Serum - Central Limit Order Book vs Automated Marker Maker

This article focuses on the core concept of the Central Limit Order Book (CLOB) within the Serum Ecosystem. A CLOB is an order book where buyers and sellers place their orders and these orders are matched on a “price-time-priority” basis. Running through the article the reader would be able to identify the need for a CLOB system in the Centralized System and how efficiently it can be accommodated into the Decentralized Space. Moreover, learners will be able to distinguish between the working of the CLOB and AMM (Automated Market Maker) and what are the related advantages and shortcomings in both trade execution systems. The article further emphasizes the risks associated with the Serum DEX and later discusses how the Serum applications can be scaled up to the next level with increased efficiency and spanning a spectrum of many different industries.


  1. Limit order - A limit order empowers you to buy or sell a stock at a price quoted by you or better. The advantage of placing a limit order is that you can place buy/sell order at the desired price. It is possible that your order may not be filled completely or partially depending upon if a counter order is available for some quantity or none at the price you’ve specified. A limit order book is a record of pending limit orders maintained by workers at the exchanges
  1. Automated Market Maker (AMM) - An AMM includes the trading of digital assets without any permission using pre-defined algorithms set inside the liquidity pools. This does not involve an order book i.e. no interaction of buyers and sellers is required. Uniswap (a DEX) uses AMM to trade on its platform.
  1. Request for Quote (RFQ) - Suppose there is an organisation or enterprise that is in the need of supplies or services. This organisation then asks the potential suppliers or service providers to submit their price quotations and stand a chance to provide goods or supply services to the enterprise.
  1. Invitation for Bid (IFB) - A company or organisation lays out an Invitation to Bid to call out for contractors to submit a proposal for a specific product or service that an organization knows it wants/needs. This defers from RFQ in terms that the IFB has a pre-planned structure for the project and the company needs only contractors to fulfil these conditions. Whereas in RFQ, contractors propose ways on how the project can be completed.
  1.  Market Liquidity (ML) - It refers to the efficiency or the ease by which an asset can be converted into direct cash without hampering its market value. Generally, market liquidity is calculated by measuring the volume of trades or pending transactions in the current market scenario. High levels of liquidity make it easy to open and close positions quickly with a tighter bid-ask spread.
  1. Price discovery (PD) - Price discovery refers to setting the price of an asset through interactions with buyers and sellers in the marketplace according to a price that both parties find acceptable. It is primarily determined by the demand and supply. Price discovery helps in understanding whether a particular asset is overbought or oversold.
  1. Liquidity Providers (LPs) - It is a person or institution responsible for facilitating trading on decentralised exchanges by providing funds to the liquidity pools and earning returns on their contribution. These liquidity providers can earn anywhere around 2% - 50% annual interest from the liquidity providers' fees.
  1. Market Fragmentation - When a homogenous market (combined entity) is distributed into various segments (known as fragments) which have their own distinct needs, requirements and preferences this is called market fragmentation. These fragments contribute to the reduction in the effectiveness of mass marketing and destroy brand loyalty.

Introduction to Central Limit Order Book

In the financial market, Market Liquidity and Price discovery play a very vital role. Before understanding the concept of CLOB and its working, one must understand how the prices and liquidity work in the financial market because this helps them to witness the execution of trade efficiently.

Relation between Price Discovery and Market Liquidity

Price discovery highly depends on the former because ML provides information regarding how readily that asset is available to be converted into cash hence ML is directly proportional to the capital provided by LPs i.e. higher the market liquidity of an asset the more capital will be put in by LPs. PD of the exchange depends on the last price provided by the data at regular time intervals and thus due to this dependency, the record is influenced by the current liquidity in the market. Thus an improvement in the liquidity increases the exchange's ability to meet the market demands and provide a truthful record of the historical price discovery. Moreover, PD cannot work effectively without ML. ML and PD are negatively affected by Market Fragmentation as it divides the trading activity (liquidity) into smaller segments. PD is efficient when all the trading activity takes place at one end.

Early days of trading and Center Limit Order Book

Before the emergence of computers, the trade was executed using floor trading. Buyers and sellers met at a physical exchange to set the next market price. During the floor trading, traders were divided into groups and each submitted an RFQ, whereas on the other hand bidders would their bid to dedicated brokers. This broker was responsible for matching buy/sell orders by shouting and using trading hand signals. Gradually when computers came into existence the CLOB came into play. A CLOB provides a trading execution model based on a transparent system that matches customers' orders (bids or offers) on a price-time priority basis. CLOB is widely used by NYSE.

Deep Dive into Serum 

Serum is a highly efficient decentralized exchange built using the Solana network which makes it quite scalable and thus widely acceptable exchange. The prime differentiating factor between Serum and other popular DEXs is that it uses Central Limit Order Book (CLOB) rather than the Automated Market Makers (used by others) to enable effective and fast trading on its platform. The inbuilt design of Serum is empowered by its on-chain CLOB which is a largely used mechanism in traditional finance and further Serum makes it permissionless and decentralised, helping its users to erode a middle party and communicate directly with a smart contract to execute trades from an order book. Solana, which is one of the key components of the exchange, provides high speed and low cost to the Serum Network making it outshine other popular decentralized exchanges, enabling Serum to perform effectively. Moreover, Serum can interact efficiently with Ethereum and it enables high composability within the decentralized finance environment by permitting other smart contract protocols to interact with its order book to share liquidity and develop more features on top of it. Serum can be used alongside Ethereum. 

Centralized Exchanges consist of numerous disadvantages compared to their decentralized counterparts.  They need a middleman or an intermediary entity responsible for order book management and execution and they are prone to various security risks such as retention of private keys which makes them slower, inefficient and expensive compared to DEX. Whereas, one of the most useful features of their design is the CLOB model, which enables users to transparently match their other with others on a “price-time-priority” basis. This model comprises an order book where the market price is depicted by the highest bid and the lowest ask and customers could choose to cross this bid-ask spread and have their order completed instantly. The CLOB model provides high levels of transparency such that users can view market depth in a real-time frame. CLOB has very strong properties but it poses a lot of challenges when it is incorporated into an on-chain system. High throughput and low execution costs of order books are the main causes behind this challenge. Hence for a CLOB to run on-chain the gas fees must be low and transactions should be quick.

Many of the original DEX protocols were aware of these difficulties and made an effort to use an AMM in place of the conventional CLOB paradigm. This strategy was invented by Uniswap, and Defi users were able to quickly and cheaply conduct transactions using their AMM system.

AMM and Order Book differences

Financial market consists of two trading models namely, Automated Market Maker and Order Book

Structure of an Order Book 

An order book works on the principle of FIFO- First In First Out. An algorithm, in the Order Book, organizes the list of traders who submitted their intent to transact to buy or to sell and subsequently organizes them in a database i.e. order book. This database is then made public to all the participating traders. 

Now, another party on the receiving end referred to as takers can go through the corresponding order by buying from a trader to sell or selling to a trader with an intent to buy, based on the quantity and the value posted the exchange will match the buyer to a seller and vice-versa. 

Order Book working Principle

There may be cases when the exchange encounters overlapping orders in the order book especially when there are multiple requests regarding the same value and quantity of a traded asset, in such cases the exchange that uses an order book concept steps into matching these orders manually using the FIFO. 

Structure of AMM

Coming to AMM, is a trading model that is automated. The key difference between the two is that in an order book where both buyers and sellers play the role of liquidity custodian, AMM on the other hand uses two-sided liquidity pools. Order Book trading model is prominent among the centralized exchanges considering its support for intermediary interference and manual components, whereas AMM is the underlying protocol used by decentralized exchanges to remove intermediaries when trading crypto assets. 

AMM working Principle

Notably, AMM empowers users to carry out the transaction of their assets without any intermediary facilitating the exchange. An order book only comes to action when there are overlapping transactions on the other hand an AMM is always active. This AMM works on the Constant Market Maker Model to determine the exchange price: X * Y = K i.e. the number of X-type crypto times the number of Y-type crypto equals constant. Hence in DEX price is determined by how much one wants to buy and not by how much someone gets for it. This model makes buying in large orders extremely expensive due to the high surge in price.

However, several core functions of an order book, such as limit orders, bids, and offers were missing in AMM. Additionally, liquidity providers were obligated to provide liquidity to both sides, were unable to determine which price they would solely offer liquidity at, and were not permitted to offer liquidity at a price other than the going market rate. Therefore, there are tradeoffs associated with an AMM model's advantages.

Central Limit Order Book (CLOB) Automated Market Maker (AMM)
Works on First in First Out Principle (FIFO) Works on constant market maker Model:

X*Y = K

Works only when there are overlapping


An AMM is always active
Orders as matched manually using FIFO They are automated systems
Buyers and sellers both play the role of liquidity custodians AMM uses two-sided liquidity pools


Working of Center Limit Order Book

Order Matching in a CLOB occurs in real-time. Initially, the market makers are required to submit their intent to transact that is place a buy order, sell order, quantity, and value. Once the exchange receives the intent it organizes it in the form of a database order book. Once they are organized on the basis of priority, CLOB proceeds to publish them to all users. After that, another party on the receiving end takes the corresponding order. Here the taker can be a buyer or seller depending on the order submitted and will be required to accept related orders based on preset pricing and volume. The order matching concept comes into action when there is an overlap of transactions. These overlaps occur when multiple orders share precisely the same attributes, namely the same price and the same value and then CLOB matches these orders in the FIFO policy. 

Orders are first ranked according to their price and the orders belonging to the same price are ranked depending on when they were entered into the book. When a new order can be matched against an existing order it gets executed otherwise the new order enters the database and waits for another order to offset it. For example, if you enter a limit order to buy at a price less than the lowest selling the order keeps waiting until someone decides to sell at your price similarly if you enter a limit order to sell at a price higher than the price anyone wants to sell for your order waits until someone is willing to sell at that price.

Advantages of Serum's Center Limit Order Book

  • A fully decentralized, on-chain order book created by Serum lets users execute orders using smart contracts while maintaining pricing and order size flexibility.
  • Users have the access to specify the price, size and direction of their trades similar to typical CLOB. With this mechanism, orders are matched on a price-time-priority basis and offer liquidity. 
  • Serum enhances composability as it can be used by other protocols in the area to bootstrap liquidity and provide matching services.
  • Solana network's high throughput and cheap transaction costs help Serum order book to reduce capital inefficiencies and liquidity segmentation.
  • Serum's CLOB is made up of other potent features like cross-chain swaps and is designed to be asset agnostic. It can build an order book that matches any Solana-based trading product like options and futures (e.g. ETH and BTC).
  • Serum’s modular protocol allows a wide wide range of applications and participants to share middleware in one location. This is made possible by the ability of its backend matching engine to be extended to virtually any financial or non-financial instrument.
  • On-chain CLOB makes it possible for other applications to connect to Serum and use its infrastructure to construct their own projects, such as a trading application that makes use of Serum's liquidity.

Serum has enabled many of the primary advantages of conventional order books for the DeFi ecosystem while maintaining the effectiveness of decentralized exchanges by developing an order book that is entirely on-chain. Overall, Serum's architecture is better suited to modularity thanks to its design, which also increases the flexibility of external applications.

Risks Associated

  • Serum is powered by Solana thus $SOL also stands for the token that is traded the most frequently on the system which poses a major concern.
  • Currently, $SOL accounts for around 82% of Serum's entire daily volume. In this way, Solana's success and Serum's fate are inextricably linked.
  • Token unlock schedule is another risk as 90% of the tokens were locked at genesis, which is a huge number. These coins are just sitting there, adding nothing to the growth of the Serum ecosystem.
  • Additionally, the token is subject to significant inflationary pressure each year—roughly 1,000,000,000 units—especially in its early years.
  • For instance, in Year 2, the circulating supply doubles. For token holders, this poses a dilution issue due to the disproportionate distribution of tokens throughout a 6-year unlock scheme.

Future Prospects of CLOB

Providing more Financial Solutions

On top of the DEX, a wide range of complex financial services may be built, all of which interact with one another to provide added value. Users gain significantly from DeFi's modularity and the synergies created by a system of projects linked first to Serum DEX and then, possibly, to one another. Users have spot trading with just the Serum DEX. The DEX can be used in new projects to experiment with different compositional techniques.

Modified Borrowing and Lending 

A borrow-lending protocol with specialized infrastructure for capital efficiency and leveraged trading can be developed using a composable on-chain CLOB. Features might enable margin trading via borrow-lending iterations with just one click and in-pool trading to exchange directly. Such on-chain capabilities are possible due to the permissionless nature of DeFi and the latency and costs of Solana. Making a market between two tokens that transform into the actual underlying upon expiration via a redemption facility could be one way to design a future contract. Futures on any underlying you can get data on can be traded with an oracle network in place. This may be composed of borrow-lending, which would thus permit leveraged trading.

Diversification beyond DEX

Whatever the system's design, everything bottoms out to the order book and DEX on the chain. And this only applies to the world of finance. Building on and connecting with the Serum DEX can also benefit sectors like social media, gaming, and travel.

This should paint a clear and encouraging picture of Serum DEX's potential as the matching engine driving projects located in Solana that take advantage of the DEX's matching service, liquidity, and price data.


The Solana ecosystem's key financial and other projects are powered by the Serum DEX core infrastructure. The ability to use Serum DEX's central limit order book (CLOB) for trading, data, pricing and risk management benefits protocols with trading-related features. Serum DEX, which receives DEX fees and uses them for $SRM buy and burn, is where the entire ecosystem bottoms out, though.

The Serum team insisted on bold design decisions in spite of the enormous difficulty, of choosing the less travelled route. One such decision was to use Solana as the foundation rather than Ethereum. A DEX with a fully on-chain central limit order book (CLOB) was an additional option, but such an architecture's enormous network intensity would be unsustainable without a blockchain like Solana.

The best technique to concentrate liquidity and make real-time adjustments are both possible with CLOBs. In the end, this leads to more precise pricing and effective markets.


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